Houston Rockets Salary Cap Update: “Total Rebuild” Edition

After closing the book on an all-too-brief 2011-12 NBA season and opening up the 2012 offseason with a flurry of activity, let’s take a look at the Houston Rockets’ current salary cap situation.

The Rockets’ Latest Moves
Since my last update, the Rockets have made the following roster moves:

Prior to the end of the season, the Rockets signed Courtney Fortson and Diamon Simpson each to two-year deals for the league minimum, with team options on the second year with a non-guaranteed salary (the options were subsequently picked up).

On June 26, the team traded Chase Budinger and the draft rights to Lior Eliyahu to the Minnesota Timberwolves in exchange for the #18 pick in the 2012 NBA Draft.

On June 27, the Rockets traded the #14 pick in the 2012 NBA Draft, Samuel Dalembert, their 2014 second round pick and cash considerations to the Milwaukee Bucks in exchange for the #12 pick in the 2012 NBA Draft, Shaun Livingston, Jon Brockman and Jon Leuer.

Royce White and the first round pick rookies could start a Rockets youth movement

The team purchased the draft rights to Turkish power forward Furkan Aldemir (the #53 pick in the 2012 NBA Draft) in a four-team trade involving the Los Angeles Clippers, the Dallas Mavericks and the Utah Jazz.

During the July Moratorium, the team signed Donatas Motiejunas to his first round rookie scale contract at the maximum permitted 120% of his scale salary.

Also on July 11, the team signed and traded Marcus Camby to the New York Knicks in exchange for Toney Douglas, the non-guaraneed contracts of Josh Harrellson and Jerome Jordan, and the Knicks’ second round picks in 2014 and 2015.

On July 13, the Rockets waived Luis Scola via the amnesty provision, clearing his salary off of the team’s salary cap. (Scola was subsequently claimed off waivers by the Phoenix Suns with a partial claim bid; and the Suns will pay Scola approximately $4.5 million per season for each of the next three years, with the Rockets paying the rest of the $31 million remaining on Scola’s contract. Major credit to Rockets owner Leslie Alexander for his willingness to pay $17.5 million for one of his best players to NOT play for him, all in the name of salary cap flexibility to pursue the opportunities necessary to return the team to championship contention.)

The Rockets signed Jeremy Lin to a three-year, $25.1 million offer sheet on July 14, which was not matched by the New York Knicks.

On July 18, the team waived Leuer and Jordan. (Leuer was subsequently claimed off of waivers by the Cleveland Cavaliers.)

On July 20, the Rockets signed and traded Courtney Lee to the Boston Celtics in exchange for JuJuan Johnson, the non-guaranteed contracts of Sean Williams and E’Twaun Moore, the draft rights to Jon Diebler, and the Charlotte Bobcats’ 2013 second round pick previously acquired by Boston. (Moore was subsequently waived.)

The team signed Omer Asik to a three-year, $25.1 million offer sheet on July 21, which was not matched by the Chicago Bulls.

Explaining the Lin and Asik Deals

The Rockets will usher in the Jeremy Lin Era this coming season

As noted above, Lin and Asik each signed (presumably) identical three-year, $25.1 million offer sheets with the Rockets. Because both players fall within the unique category of high-quality restricted free agents with only one or two years in the league (both are two-year veterans), Lin and Asik were subject to what has become commonly known as the “Gilbert Arenas” provision of the CBA, or the Arenas Rule. (More on the “Gilbert Arenas” provision can be found here).

The Arenas Rule prohibits any team from offering these types of players a starting salary greater than the Non-Taxpayer Mid-Level Exception ($5 million for 2012-13) and only a 4.5% raise in Year 2 of the contract (in this case, $5.225 million). Starting in Year 3, the salary can balloon to up to the applicable maximum player salary. Like with other restricted free agents, the player’s former team has the right to match any offer for the player.

The rationale for these salary limits is that the player’s former team must be allowed at least some avenue by which to potentially match any offer sheet, either via Early Bird rights (which allows a team to pay up to the average player salary for a player coming off a two-year contract or having spend two years with the team) or the Non-Taxpayer Mid-Level Exception (for Non-Bird free agents with only one year with the team). The reason for the ballooning of the salary in Year 3 is that the player’s former team would have obtained full Bird rights on such player by that time and would then be allowed to offer such player a maximum salary.

From a salary cap standpoint, if the team extending the offer sheet wishes to give such a player a raise greater than 4.5% in Year 3 of the offer sheet, it must have at least enough cap room available to cover the average annual salary; and the player will count against the offering team’s salary cap (and for luxury tax purposes) at that average figure in each year of the offer sheet. However, unless the player’s former team has a similar amount of available cap room, it must have the player’s actual salary from year to year count against its salary cap and luxury tax calculations.

For lack of a better term, Rockets GM Daryl Morey and the Houston front office “artfully exploited” the Arenas Rule.

Omer Asik will be called upon to anchor the Rockets' defense this season

By limiting the Lin and Asik offer sheets to only three years (as opposed to four-year deals), the Rockets were able to concentrate the balloon payment into Year 3, rather than having some of that ballooning salary spread over multiple seasons. The offer sheets will pay Lin and Asik the maximum player salary for five-year veterans (approximately $14.898 million), making it extraordinarily painful for either New York or Chicago (both tax-paying teams) to match. The cap hit for Houston on each player is $8.37 million in each season; but the cap hit to their former teams would be $5 million in 2012-13, $5.225 million in 2013-14 and $14.898 million in 2014-15 (which is the actual payment schedule, even for Houston).

Making matters worse for the Knicks and Bulls, the year in which the massive cap hit for their now-former players would occur (the 2014-15 season) is also the first year in which the league’s most punitive luxury tax — the “repeater tax” — will impact teams that are taxpayers in each of the three prior seasons. Is it any coincidence that both New York and Chicago project as taxpayers in each of those season? I think not.

For those wondering what the salary cap impact would be if the Rockets later decide to trade either Lin or Asik, the receiving team would get the player at the same $8.37 million per year cap hit at which Houston has them. While it is still not completely clear how the actual salary payments would be treated, those would presumably be covered by the receiving team in full. In other words, if the Rockets traded Asik to another team in the summer of 2014, Asik would only count $8.37 million for salary-matching purposes, but his entire $14.898 million salary for 2014-15 would presumably need to be covered by his new team (the Rockets would likely be unable to contribute more than the maximum $3.3 million cash allotment permitted).

Salary Commitments and Potential Cap Room(DISCLAIMER: Further roster moves will likely be made. The figures below probably do not represent the Rockets’ true cap situation once such additional moves are made; they are solely intended to give you a picture of the Rockets’ current cap situation.)

Based on this season’s maximum salary cap of $58.044 million, in order for the Rockets to maintain rights to all of their current players, they will have approximately $4.55 million in salary cap room. If the Rockets simply waive their fully non-guaranteed contracts (Williams, Fortson, Simpson and Harrellson), though, that number jumps to approximately $7.75 million in cap room. In the event that the Rockets decide to waive (and eat the partial guarantees on) Livingston and Smith, that figure could conceivably reach as high as $10.63 million. However, those figures could be reduced slightly (by up to $858,440) if one or more of the 2012 first round picks end up signing contracts with the Rockets for up to the maximum permitted 120% of their rookie scale salaries.

Contrary to the popular belief of the national media, the Rockets still have PLENTY of cap flexibility to pursue free agents and trades — namely, for a certain Orlando Magic center — even after signing both Lin and Asik to lucrative deals.

Potential Superstar Acquisition
Much has been made of the Rockets’ pursuit of Dwight Howard. Houston is currently (and finally!) being recognized by most of the mainstream media as the frontrunners to either land Howard or possibly acquire another piece (like Lakers center Andrew Bynum) as part of a three-team trade with Orlando. The Rockets possess the unique combination of (1) enticingly high draft picks (most notably, the Toronto pick acquired in the Lowry trade), (2) high-ceiling young players (in particular, Lamb, Motiejunas and Parsons) and (3) the cap flexibility — via cap room and/or expiring or non-guaranteed contracts — to take on some additional salary from Orlando in order to clear the Magic’s books for a fresh start post-Howard.

Daryl Morey kinda wants to acquire this guy

Because the Rockets possess the potential for either/both (A) significant cap room (if they waive all of their non-guaranteed contracts) to absorb incoming Orlando players and/or (B) salary-matching trades financially beneficial to Orlando (if the Rockets instead use expiring or non-guaranteed contracts for salary-matching purposes), there are countless scenarios in which a Howard-to-Houston trade can be accomplished. It is virtually impossible to predict which players, picks and other assets will be included in whatever trade might end up happening. However, in order to illustrate the Rockets’ cap flexibility, I will walk through one hypothetical variation of such a trade.

Let’s say the Rockets trade Martin, Patterson, Lamb, Jones, the Toronto first round pick, the Dallas first round pick and the Charlotte second round pick to Orlando in exchange for Howard ($19.54 million), Jason Richardson ($5.8 million in 2012-13, $6.2 million in 2013-14 and a $6.6 million player option in 2014-15) and Chris Duhon ($3.25 million in 2012-13 and $3.5 million in 2013-14, only $1.5 million of which is guaranteed if waived on or prior to June 30, 2013).

(NOTE: This does not in any way reflect what I think will or should happen and yes, I know that’s a lot to give up for that Orlando package. All the more reason to use this as the hypothetical.)

By waiving all of their non-guaranteed contracts, the Rockets can create sufficient cap room to absorb the salaries for Richardson and Duhon, while sending Orlando back only draft picks and the draft rights to Lamb and Jones. Then, with the Rockets largely capped out by that first component trade, they could then ship Martin and Patterson to Orlando for Howard. (FYI, the Martin-Patterson combination comes out to virtually the absolute least salary an over-the-cap team could trade to get back Howard’s contract.)

Different variations of a Howard trade (including the hypothetical above) will likely generate various trade exceptions to Houston and/or Orlando; and some scenarios could be conceived to potentially create a very large trade exception. Do not be surprised if a final Howard trade configuration has the result of generating a huge trade exception for Orlando. Magic GM Rob Hennigan is creative enough to structure it that way.

Other Trade Options
The pursuit of a mega-trade for a star player is not the only use to which the Rockets can put their cap room. By being under the salary cap, so long as the Rockets do not exceed the maximum salary cap by more than $100,000 upon completion of a particular trade, the team would not be subject to either salary matching rules or the 60-day waiting period to aggregate salaries of players acquired in prior trades. In other words, if the Rockets are $10 million below the cap, (1) they can trade a $2 million player in exchange for another team’s player making up to $12.1 million or (2) they can aggregate the salaries of Douglas ($2.07 million, recently acquired from New York), Johnson ($1.09 million, recently acquired from Boston) and Brockman ($1 million, recently acquired from Milwaukee) in exchange for another team’s player making up to $14.2 million.

If the Rockets cannot find another player — either via free agency or trade — who is worth pursuing or is willing to sign with/come to Houston, then having available cap room can benefit the team in other ways. For instance, the Rockets can help facilitate trades between two or more other teams that might not otherwise be able to complete their trade without use of the Rockets’ cap room. In exchange for facilitating a trade, the Rockets would receive some consideration, be it cash, picks or players.

Also, they could just sit on their cap room and wait for a team to get desperate enough to trade them something for the privilege of using that room. Oklahoma City used this strategy a few years ago with Utah (then fearful of paying the luxury tax), which coughed up talented young point guard Eric Maynor in exchange for the Thunder taking on the remaining few months of Matt Harpring’s contract (which itself was largely covered by insurance).

Believe it or not, the Rockets actually have assets other than cap room that they can use in trades this summer. Patterson, Morris, Parsons, Motiejunas, Lamb, White and Jones all have some decent trade value as young prospects. The Toronto pick is extraordinarly valuable. The future Dallas first rounder is another nice asset, as is the Charlotte second rounder. The Rockets hold the draft rights to at least two players — All-Euroleague point guard Sergio Llull and the aforementioned Aldemir — who may interest teams now or in the future.

Martin will have a $12.44 million expiring contract while still being a very productive offensive player. Those anxious to “dump” Martin at the first chance, please note that Martin’s expiring contract may be more valuable in trades than $12.44 million in additional cap space. The Rockets can take back up to $17-18 million in incoming salary in exchange for Martin’s outgoing salary.

Conclusion
I know there is a great feeling of disappointment by many fans after the Rockets ended the 2012 NBA Draft without a superstar or a top-5 pick. Fortunately, the stellar play of the team’s rookies in the NBA Summer League in Las Vegas last week, together with all the rumored Howard trade talk, has seemingly caused such disappointment to dissipate.

Meanwhile, the Rockets have set themselves up nicely to make a run at a major acquisition in the coming months, either via free agency or trade, by positioning themselves as one of few NBA teams with both cap room and a slew of tradeable assets. They have compiled so many assets in the past 2-3 years that they can afford to “overpay” for a talent upgrade if necessary. Or they can make some moves for the future while still preserving salary cap flexibility for 2013 (when the Rockets, with their current roster, could conceivably have as much as $27 to 32 million in cap room!) and beyond, adding even more flexibility to trade other parts going forward in their pursuit of a star acquisition.

It’s only fitting that Morey is on his way to the Summer Games in London. He, with significant help from Mr. Alexander and the rest of the Houston front office, has given the Rockets the flexibility of an Olympic gymnast.